Watchdog fears the Chancellor will use more magic tricks to balance the country’s books

The independent Office for Budget Responsibility (OBR) has warned Rachel Reeves against using smoke-and-mirrors accounting tricks to balance the country’s books.

In an extraordinary swipe at the Chancellor, the powerful watchdog has highlighted a number of ‘budget illusions’ that it could be tempted to ‘exploit’ under new debt rules that would weaken public finances.

Reeves’s Budget has pushed borrowing costs to their highest level in a year as investors give her package the thumbs down amid growing concerns that it would be neither credible nor affordable.

The OBR’s warning is particularly striking as it has come under heavy fire from the Tories. Shadow chancellor Jeremy Hunt accused the watchdog of pro-Labour bias for publishing its reports on Reeves’ claims that she had exposed a £22 billion black hole in the public finances at the same time as the budget.

Reeves used the OBR report to blame her predecessors for her huge tax increases. Although the OBR found that Treasury officials did not share information about £9.5 billion of pressure on departmental budgets, it did not criticize Hunt or other Tory ministers.

Ms Reeves’ plans for an additional £32bn a year of borrowing have also raised fears that mortgage costs will remain higher for longer.

Traders still think the Bank of England will cut rates by a quarter of a percentage point to 4.75 percent next Thursday, but they have postponed expectations of further easing until early next year.

It follows a fierce row between Reeves and her predecessor, Jeremy Hunt, who she accused of hiding a £22 billion “black hole”, which he dismissed as “absolute nonsense”.

The OBR’s intervention is particularly embarrassing for the Chancellor after she insisted her increase in employers’ National Insurance contributions was not a tax increase for employees, a claim met with widespread ridicule by business leaders.

Amid Conservative claims that she was ‘fooling around with the numbers’, Reeves replaced the old way of measuring debt with a broader definition, called public sector net financial liabilities, or PSNFL. This includes counting both the benefits of investments and the costs, giving the Chancellor more leeway.

But the move still left Reeves with just £16bn of room to maneuver under her debt rule if things didn’t go to plan – a figure the OBR called ‘very low’.

Some of that “headroom” has already been wiped out as borrowing costs have soared since the watchdog’s forecasts were finalized. This means more tax increases are likely on top of the £40 billion unveiled last week.

In its Budget report, the OBR sounded the alarm over the new debt rules, which it said posed ‘different risks and policy incentives’ than the old ones. These include issuing ‘low quality loans’ that may not be repaid, investing in ‘risky assets’ and taking pension costs off the books.

The watchdog said it had adjusted its forecasts for the UK economy to try to ‘minimise the potential illusion’. In other words, it felt the need to take into account the fact that Reeves might indulge in tricks.

About 12 percent of the £9 billion loans provided by the new National Wealth Fund are expected to turn sour, it added.

It noted that public sector pension liabilities for doctors and teachers worth £1.3 trillion (or almost half of Britain’s annual economic output) are still off the state balance sheet.

Reeves has put in place ‘guardrails’ to ensure investments deliver ‘good value for money’. But experts are skeptical and say this is the latest in a series of changes to the way debt is measured.